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Wednesday, July 5, 2017

Democracy (and Wages) in America

On Monday we looked at how
the wage system operated in nineteenth century America prior to the Civil
War.We noted that when times were good
and workers in demand, wages tended to rise.When times were bad and workers had to take what they could get, wages
tended to fall.We concluded that trying
to induce prosperity by raising wages puts the cart before the horse; high
wages don’t bring prosperity, prosperity brings high wages.

Adam Smith, author of The Wealth of Nations

Trying to circumvent the
system by manipulating wages artificially is more than illogical, though.It’s an example of what Adam Smith was
talking about in his “invisible hand” argument.As he said,

By preferring the support of domestic to that of foreign industry,
he intends only his own security; and by directing that industry in such a
manner as its produce may be of the greatest value, he intends only his own
gain; and he is in this, as in many other cases, led by an invisible hand to
promote an end which was no part of his intention. Nor is it always the worse
for the society that it was no part of it. By pursuing his own interest, he
frequently promotes that of the society more effectually than when he really
intends to promote it. I have never known much good done by those who affected
to trade for the public good.

Translation: by
working within the system, someone benefits not only himself, but everyone
involved in the system — assuming that the system is based on sound principles
and operates justly — even if he intends only his own good.If, however, someone circumvents the system
(as by raising wages with no increase in production or in the market cost of
labor), things can start to unravel rather quickly — even if he intends the
greatest good.Why?Because raising wages doesn’t cause
prosperity, prosperity causes a raise in wages.Raising wages to cause prosperity throws a sabot into the works.

Fabianism: wages the only legitimate income

But let’s
consider the possibility that we’re looking at the wrong thing here.Are we concerned with getting enough wages to workers . . . or getting enough income
to people?A somewhat different question . . . unless
you assume as a given that “wages” and “income” are always and in every case
the same, as in fact some of the Fabian socialists claimed.

Once we start
looking at the correct relationship between wages and prosperity, however, we
see that what we’re really looking at is income
and prosperity.If we want to increase
income, we must make people prosperous, that is, productive.We don’t make people productive by increasing
income.

Just the
opposite, in fact.What some people have
called the “strike-conflict model of industrial relations” is geared toward
getting as much income for as little production as possible. “Featherbedding” is the perfect situation for
the strike-conflict model: someone draws a wage for no production at all.

So how do you
raise wages without conflict?Obviously,
by making people productive, thereby putting employers and employed on a more or
less equal footing.Alexis de Tocqueville noted
the correct relationship of cause and effect in the matter of wages.As he noted in the second volume of Democracy in America,

Alexis de Tocqueville

Most of the remarks which I have already made in speaking of
servants and masters, may be applied to masters and workmen. As the gradations
of the social scale come to be less observed, whilst the great sink the humble
rise, and as poverty as well as opulence ceases to be hereditary, the distance
both in reality and in opinion, which heretofore separated the workman from the
master, is lessened every day. The workman conceives a more lofty opinion of
his rights, of his future, of himself; he is filled with new ambition and with
new desires, he is harassed by new wants. Every instant he views with longing
eyes the profits of his employer; and in order to share them, he strives to
dispose of his labor at a higher rate, and he generally succeeds at length in
the attempt. In democratic countries, as well as elsewhere, most of the branches
of productive industry are carried on at a small cost, by men little removed by
their wealth or education above the level of those whom they employ. These
manufacturing speculators are extremely numerous; their interests differ; they
cannot therefore easily concert or combine their exertions. On the other hand
the workmen have almost always some sure resources, which enable them to refuse
to work when they cannot get what they conceive to be the fair price of their
labor. In the constant struggle for wages which is going on between these two
classes, their strength is divided, and success alternates from one to the
other. It is even probable that in the end the interest of the working class
must prevail; for the high wages which they have already obtained make them
every day less dependent on their masters; and as they grow more independent,
they have greater facilities for obtaining a further increase of wages.

Farmer and wage worker

I shall take for example that branch of productive industry which is
still at the present day the most generally followed in France, and in almost
all the countries of the world--I mean the cultivation of the soil. In France
most of those who labor for hire in agriculture, are themselves owners of
certain plots of ground, which just enable them to subsist without working for
anyone else. When these laborers come to offer their services to a neighboring
landowner or farmer, if he refuses them a certain rate of wages, they retire to
their own small property and await another opportunity.

I think that, upon the whole, it may be asserted that a slow and
gradual rise of wages is one of the general laws of democratic communities. In
proportion as social conditions become more equal, wages rise; and as wages are
higher, social conditions become more equal.(Alexis de Tocqueville, “Influence of Democracy on Wages,” Democracy in America, II.3.vii.)

De Tocqueville does go on to
warn, however, that when employers grow rich and powerful and are able to
combine against the workers, wages tend to fall.You then have the paradox of public
prosperity in which only some people participate — and the gap grows wider and
wider as ownership of capital replaces ownership of labor as the principal
means of being productive.

So, ultimately, wages, high
or low, are not the main thing here.It’s income, not the specific mechanism — and income depends on becoming
productive, which in a modern economy means owning both labor and capital.As the late Walter Reuther explained,

Reuther: raising wages increases costs and concentrates wealth

Profit sharing in the form
of stock distributions to workers would help to democratize the ownership of
America’s vast corporate wealth which is today appallingly undemocratic and
unhealthy. The Federal Reserve Board recently published data from which
it is possible to estimate the degree of concentration in the ownership of
publicly traded stock held by individuals and families as of December 1962.
Preliminary analysis of these data indicates that, despite all the talk of a
“people’s capitalism” in the United States, little more than one percent of all
consumer units owned approximately 70 percent of all such stock. Fewer
than 8 percent of all consumer units owned approximately 97 percent—which
means, conversely, that the total direct ownership interest of more than 92
percent of America’s consumer units in the corporation-operated productive
wealth of this country was approximately 3 percent. Profit sharing in a
form that would help to correct this shocking maldistribution would be highly desirable
for that reason alone. . . . If workers had definite assurance of equitable
shares in the profits of the corporations that employ them, they would see less
need to seek an equitable balance between their gains and soaring profits
through augmented increases in basic wage rates. This would be a desirable
result from the standpoint of stabilization policy because profit sharing does
not increase costs. Since profits are a residual, after all costs have been
met, and since their size is not determinable until after customers have paid
the prices charged for the firm’s products, profit sharing as such cannot be
said to have any inflationary impact upon costs and prices. [Testimony before
the Joint Economic Committee of Congress on the President’s Economic Report,
February 20, 1967.]

Clearly there needs to be a
way of equalizing economic opportunity without injustice.Capital Homesteading,
a proposal applying the principles of the Just Third Way, is one possibility
that needs to be considered seriously.